03/13/2019

One of Silicon Valley’s most prominent private equity investors — and one of the tech sector’s leading proponents of how to invest ethically and for social impact — has been charged in an explosive college admissions scandal that was revealed Tuesday, March 12.

Prosecutors charged Bill McGlashan, a founder and managing partner at TPG Growth — which has made landmark investments in companies like Uber and Airbnb — on fraud allegations for trying to engineer the admission of his son to the University of Southern California.

Side note: Why anybody would take so much trouble to get their kid into USC is beyond me.

Main note: This is a classic example of how limousine liberals in Hollywood and Silicon Valley (and elsewhere, of course) consistently fail to practice what they preach.

03/11/2019

I'm working on a project about corporate purpose and populism. I originally planned for it to include a section on Citizens United, but have decided that section needs to go. But having a place to publish work that has no where else to go has long been one of my main reasons for having a blog.

In my view, the case for Delaware’s rule of shareholder wealth maximization becomes even stronger when right-wing populists have significant political power. The populist contribution is not providing new theoretical constructs in the intellectual debate, but rather opening new political possibilities. As we shall see, one of the principle arguments in favor of Delaware’s rule is that the acknowledged externalities of corporate behavior are best addressed through general welfare legislation rather than via the fiduciary obligations of corporate directors.[1] Delaware Chief Justice Leo Strine and his coauthor Nicholas Walter contend that the U.S. Supreme Court’s Citizens United decision undermined that argument by changing the political dynamics in ways that strengthened corporate power.[2] Even if one accepts their argument,[3] however, a resurgent right-wing populism may provide alternative constraints on corporate political power sufficient to revitalize the argument for leaving regulation of corporate externalities to general welfare legislation.

A standard move in the corporate social responsibility debate by defenders of the shareholder wealth maximization norm is the claim that the legislative and “regulatory process [is] an adequate safeguard against corporate overreaching for non-stockholder constituencies and society generally.”[4] Various commentators, notably including Delaware Supreme Court Chief Justice Leo Strine, contend that a wave of corporate political spending unleashed by the controversial Citizens Uniteddecision[5]undermines that argument:

Because corporate wealth far exceeds that held directly by human beings, if corporations are able to act directly to influence who is elected to office, the laws and regulations in our society will increasingly tend to tolerate the imposition of greater externalities, because they will be enacted by politicians who have been elected in an expensive process in which money matters, and in which securing the support of non-human corporate money with a monocular focus on profit will be important to electoral competitiveness.[6]

I have elsewhere disagreed with their argument on several grounds. First, “much corporate political spending is likely to be defensive,”[7]being aimed at staving off additional regulation rather than eroding existing regulations.[8] Absent “a showing that the benefits of foregone regulations exceed their costs, there is no reason to assume that corporate political spending increases the extent to which corporations can externalize costs.”[9]

In addition, Strine and Walter fail to explore the implications of the fact that large corporations dominate corporate campaign spending. First, spending by such corporations is highly constrained by reputational considerations due to “the seriousness with which large corporations treat any potential threats to their goodwill arising from ... negative publicity” generated by unpopular contributions. Second, and more important, while Strine and Walter assume corporations use political spending exclusively to externalize the negative costs of their activities, the reality is that large corporations frequently support regulations that force corporations to internalize social costs. They do so because such regulation can create significant costs for smaller competitors and barriers to entry for startups. Because regulatory costs frequently do not scale, they are often borne disproportionately by small businesses and startups. This observation is not offered as a defense of corporate political spending, but solely as a critique of Strine and Walter’s assumption that corporate political spending is inevitably anti-regulation.[10]

The rise of right-wing populism as a viable political force strengthens the case against Strine and Walker’s Citizens United argument. Although the early Tea Party activists tended towards libertarian views on economic issues and regulation,[11] the right of center populist movement is evolving towards an increasingly anti-business stance. This sentiment may well find expression in a regulatory agenda analogous to the Southern Agrarian program. If so, the risk that Citizens United will permit corporations to externalize more costs will be further mitigated.

03/07/2019

On February 28, 2018, Dick’s Sporting Goods announced that it would no longer sell long guns to 18- to 20-year-olds. On March 8, 2018, Dick’s was sued for violating the Michigan Elliott-Larsen Civil Rights Act, which prohibits discrimination on the basis of age in public accommodations. Dick’s and Walmart were also sued for violating Oregon’s ban on age discrimination. In addition to corporate liability under various state civil rights acts, directors of Dick’s and Walmart face the threat of suit for breaching their fiduciary duties—suits that may be much harder to defend than the more usual breach of fiduciary duty suit.

Delaware corporation law appears to have an underappreciated per se doctrine where the board directs the corporation to violate the law. A knowing violation of positive law is bad faith, which falls under the duty of loyalty. The business judgment rule will not apply and exculpation will not be available under Section 102(b)(7). The shareholders may not even need to show harm.

This paper examines the relevant legal doctrine but also takes a step back to consider what the rule should be from an ethical and a moral standpoint. To do so, rather than apply traditional corporate governance arguments, this paper considers broader moral theories. In addition to the utilitarian calculus that is so ubiquitous in corporate governance scholarship via the law and economics movement, this paper considers the liberalism of both John Rawls and Robert Nozick. But liberalism may seem less persuasive given the rise of illiberalism politically on both the American right and left. Given that, this paper also considers two non-liberal models: one a populist modification of Charles Taylor’s democratic communitarianism and the other Catholic Social Thought.

Unsurprisingly, the proper rule depends on which moral theory is applied. If that theory is liberalism (of either form covered), then a per se approach is troubling. Harm to the corporation must be shown, and either the Delaware legislature or the corporate players, depending on the form of liberalism, must acquiesce to a per se rule. Counterintuitively, it is the per se rule that runs counter to basic democratic norms. It gives the power to litigate in response to harm not to the party harmed but to a third party. Given the divergent results from applying different moral theories, and given the democratic difficulty, the Delaware legislature should clarify the standard. It will likely find that a harsh, per se standard is unjustified.

10/19/2018

A little more than two years ago, we published the Commonsense Principles of Corporate Governance. That work represented a collaborative effort – a search for common ground – by representatives of some of America’s largest corporations and institutional investors. We said then, and it is no less true today, that the long-term prosperity of millions of American workers, retirees and investors depends on the effective governance of our public companies. We hoped that our Principles would be part of a larger dialogue about the responsibilities and need for constructive engagement of those companies, their boards and their investors. We think that has been the case. Other groups have published their own works on the subject. Among them are an investor-led effort by the Investor Stewardship Group (ISG) called the Framework for U.S. Stewardship and Governance, a business-led effort by the Business Roundtable (BRT) called Principles of Corporate Governance, and a piece by the International Business Council of the World Economic Forum called The New Paradigm. ...

Today, we endorse the ISG Framework, the BRT Principles and The New Paradigm as counterweights to unhealthy short-termism. Indeed, a number of the companies and organizations represented in those efforts were also part of ours. Moreover, in light of the work of the ISG, the BRT the World Economic Forum and others, and after further reflection on our own Commonsense Principles, we decided to re-convene and revise the Principles – we call them Commonsense Principles 2.0. Ultimately, we hope that the many sets of corporate governance principles currently in circulation can be harmonized and consolidated, and reflect the combined views of companies and investors. We do worry that dueling or competing principles could impede, rather than promote, healthy corporate governance practices.

We are also today making a commitment to apply the Commonsense Principles 2.0 in our businesses – and we hope others will do so as well.

10/08/2018

Three ongoing mega-trends are reshaping corporate governance: indexing, private equity, and globalization. These trends threaten to permanently entangle business with the state and create organizations controlled by a small number of individuals with unsurpassed power. The essay focuses on indexation. After providing background, the essay describes the rise of and reasons for indexation, noting that “passive” indexed investing takes a variety of forms. Data on indexation are presented — with the bottom line that indexation has progressed farther than most realize, because foreign ownership, institutional indexation, and “closet” indexation are often neglected by observers. Index providers’ incentives, resources, and methods are reviewed, with an emphasis on the how such providers have greater practical importance than simpler analytical approaches might suggest. The essay ends with an outline of policy options, and preliminary analyses of which seem likely to address the “Problem of Twelve” — the likelihood that in the near future roughly twelve individuals will have practical power over the majority of U.S. public companies.

The prospect of twelve people even potentially controlling most of the economy poses a legitimacy and accountability issue of the first order – one might even call it a small “c” constitutional challenge. Large companies have always tried to influence the law to protect or extend the power of those in control of those companies, through litigation and lobbying, among other means. In the late nineteenth century, the polity responded by passing antitrust laws, using those laws to break up large companies, banning corporate participation in elections, creating an administrative state, and legalizing labor unions. Together, those responses can fairly be seen as a small “c” constitutional response to the threat posed by the concentration of economic and political power created by the country’s first merger wave.

I think Coates has pointed out a genuine problem, which crystalizes an inchoate concern that has motivated both left- and right-wing populists in recent years. As I document in my own recent paper, Corporate Purpose in a Populist Era, available at SSRN: https://ssrn.com/abstract=3237107or http://dx.doi.org/10.2139/ssrn.3237107, I describe the historical concerns of right of center populists with concentrated corporate power:

Some populists were simply doubtful of the corporation’s fitness for purpose, disputing its utility as a way of organizing production.[1] More often, however, right-wing populists objected to the separation of ownership and control inherent in the corporate form, arguing that it separated ownership from responsibility.[2] This concern was not driven by populist sympathy for investors, which is the concern most modern scholars associate with the separation of ownership and control, but rather with the lack of social accountability inherent in dispersed and distant ownership.[3] The Agrarians believed modern corporate capitalism had created a new class of absentee owners, which had broken down older systems in which owners and laborers had recognized their mutual obligations.[4] The Agrarians thus echoed Berle’s contemporaneous complaint that the ownership structure of modern corporations divorced ownership and control,[5] but added to it the further complaint that the public corporate form divorced a business’ owners from the firms workers and the local communities within which the firm did business.[6]

The Agrarian ideal was small business with local owners who were embedded in the community.[7] Whether it was ever practicable to restore such a bucolic utopia—assuming one ever existed—in a modern industrial economy is highly doubtful.[8] But even if it were, what the Agrarians—among others—failed to understand is that the separation of ownership and control in the corporation is a feature and not a bug.[9] Only the very smallest and most highly localized businesses could exist without separating ownership from control.[10]

In general, most right-wing populists came to recognize that the problem was not the corporate form as such, acknowledging that the corporate form could be used advantageously even by locally owned and operated businesses.[11] The problem thus was not the form itself but rather the massive power wielded by the very largest corporations.[12]

Size and the resulting potential for concentrated economic power are thus recurring themes in the populist critique of the corporation. Late 19thCentury populists thought that the growing power of corporations was a significant threat to their economic and even political liberty.[13] The Southern Agrarians likewise believed, as Agrarian Lyle Lanier observed, that “the corporate form of our economic system makes possible a scale of exploitation unheard of in history.”[14] In particular, the Agrarians saw large corporations as Leviathans trampling on their employees. The labor such corporations provided lacked security. It was performed under dehumanizing conditions. Yet, the law protected it by enshrining the rights of corporations into the constitution.[15] The Southern Agrarians further believed that the concentration of economic power in large corporations had created “a plutocratic capitalist class” that effectively ruled the country and thus stood ready to fully exploit their power over farmers and workers.[16]

Much the same set of concerns motivates many Tea Party members. In response to the Citizens United decision,[17]for example, Tea Party co-founder Dale Robertson complained that “[c]orporations are not like people. Corporations exist forever, people don’t. Our founding fathers never wanted them; these behemoth organizations that never die. ... It puts the people at a tremendous disadvantage.”[18] Tea Party activists also tend to be uncomfortable with business’ political agenda and business’ lack of support for Tea Party social issues.[19] The inability or unwillingness of large corporations to assist in addressing “the political alienation and economic instability” felt by many gave rise to “both left- and right-wing populism” and helped elect Donald Trump.[20]

Coates' analysis thus makes concrete the ways in which changing corporate governance demands the attention of populist reformers, so as to break up a concentration of power almost unprecedented in American economic history.

09/06/2018

A.P. Smith Manufacturing Co. v. Barlow, the most frequently cited example of cases validating corporate social responsibility, upheld a corporate charitable donation on the ground, inter alia, that “modern conditions require that corporations acknowledge and discharge social as well as private responsibilities as members of the communities within which they operate.”[1]Ultimately, however, the differences between Barlowand cases like Dodgev. Ford Motor Co.[2]have little more than symbolic import. As the Barlowcourt recognized, shareholders’ long-run interests are often served by decisions (such as charitable giving) that appear harmful in the short-run. Because the court acknowledged that the challenged contribution thus could be justified on profit-maximizing grounds, its broader language on corporate social responsibility is arguably mere dictum.

As we have seen, A. P. Smith Manufacturing Co. v. Barlow,[3]is often cited as a leading corporate social responsibility decision. Ironically, however, the specific question presented therein—the validity of corporate philanthropy—has been resolved in a more narrow way. Corporate charitable donations are subject to attack under two doctrines: ultra vires and breach of fiduciary duty. Neither is likely to succeed, so long as the amount in question is reasonable and some plausible corporate purpose may be asserted.

Virtually all states have adopted statutes specifically granting corporations the power to make charitable donations,[4]which eliminates the ultra vires issue. Although these statutes typically contain no express limit on the size of permissible gifts, courts interpreting the statutes require corporate charitable donations to be reasonable both as to the amount and the purpose for which they are given.[5]The federal corporate income tax code’s limits on the deductibility of corporate charitable giving are often used by analogy by courts seeking guidance on whether a gift was reasonable in amount.

As for breach of fiduciary duty claims, the principles announced in Dodge v. Ford Motor Co.[6]arguably require that corporate philanthropy redound to the corporation’s benefit. As Shlensky v. Wrigley[7]suggests, however, reasonable corporate donations should be protected by the business judgment rule.[8]Consequently, Barlow’s discourse on corporate social responsibility properly is regarded as mere dicta.

In the wake of the 2016 US Presidential election and similar developments in parts of Europe, commentators widely acknowledged the rise of populist movements on both the right and left of the political spectrum that both were deeply suspicious of big business. This development potentially has important implications for the law and practice of corporate purpose.

Left of center corporate social responsibility campaigners have long advocated the use of “boycotts, shareholder activism, negative publicity, and so on” to pressure corporate managers to act in ways those campaigners deem socially responsible. Right of center populists could use the same tactics to induce corporate directors to make decisions they favor. The question thus is whether they are likely to do so based on their historical track record.

Assuming for the sake of argument that right-of-center populists begin focusing on corporate purpose, the question arises whether modifying the shareholder wealth maximization norms so as to give managers more discretion to take the social effects of their decisions into account would lead to outcomes populists would view as desirable. Populists historically have viewed corporate directors and managers as elites opposed to the best interests of the people. Today, right of center populists find themselves increasingly at odds with an emergent class of social justice warrior CEOs, whose views on a variety of critical issues are increasingly closer to those of blue state elites than those of red state populists.

Finally, this article reverses field by suggesting that the case for Delaware’s rule of shareholder wealth maximization becomes even stronger when right-wing populists have significant political power. A resurgent right-wing populism may provide alternative constraints on corporate political power sufficient to revitalize the argument for leaving regulation of corporate externalities to general welfare legislation.

The Accountable Capitalism Act [that she recently introduced in Congress] ... would give workers a stronger voice in corporate decision-making at large companies. Employees would elect at least 40% of directors.

In effect, she would mandate a version of codetermination. Early in my career I wrote a series of articles explaining why employee involvement in corporate governance is a fundamentally bad idea:

In my (sadly out of print) book Corporation Law and Economics, my analysis of corporate voting rights begins by showing that public corporation decisionmaking must be conducted on a representative rather than participatory basis. It further demonstrates that only one constituency should be allowed to elect the board of directors. It then turns to the question of why shareholders are the chosen constituency, rather than employees. In this blog post, I focus on the latter issue, since that it the key issue raised by Warren's bill.

The standard law and economics explanation for vesting voting rights in shareholders is that shareholders are the only corporate constituent with a residual, unfixed, ex post claim on corporate assets and earnings.[1]In contrast, the employees’ claim is prior and largely fixed ex ante through agreed‑upon compensation schedules. This distinction has two implications of present import. First, as noted above, employee interests are too parochial to justify board representation. In contrast, shareholders have the strongest economic incentive to care about the size of the residual claim, which means that they have the greatest incentive to elect directors committed to maximizing firm profitability.[2]Second, the nature of the employees’ claim on the firm creates incentives to shirk. Vesting control rights in the employees would increase their incentive to shirk. In turn, the prospect of employee shirking lowers the value of the shareholders’ residual claim.

At this point, it is useful to once again invoke the hypothetical bargain methodology. If the corporation’s various constituencies could bargain over voting rights, to which constituency would they assign those rights? In light of their status as residual claimants and the adverse effects of employee representation, shareholders doubtless would bargain for control rights, so as to ensure a corporate decisionmaking system emphasizing monitoring mechanisms designed to prevent shirking by employees, and employees would be willing to concede such rights to shareholders.

Granted, collective action problems preclude the shareholders from exercising meaningful day-to-day or even year-to-year control over managerial decisions. Unlike the employees’ claim, however, the shareholders’ claim on the corporation is freely transferable. As such, if management fails to maximize the shareholders’ residual claim, an outsider can profit by purchasing a majority of the shares and voting out the incumbent board of directors. Accordingly, vesting the right to vote solely in the hands of the firm’s shareholders is what makes possible the market for corporate control and thus helps to minimize shirking. As the residual claimants, shareholders thus would bargain for sole voting control, in order to ensure that the value of their claim is maximized. In turn, because all corporate constituents have an ex ante interest in minimizing shirking by managers and other agents, the firm’s employees have an incentive to agree to such rules.[3]The employees’ lack of control rights thus can be seen as a way in which they bond their promise not to shirk. Their lack of control rights not only precludes them from double-dipping, but also facilitates disciplining employees who shirk. Accordingly, it is not surprising that the default rules of the standard form contract provided by all corporate statutes vest voting rights solely in the hands of common shareholders.

To be sure, the vote allows shareholders to allocate some risk to prior claimants. If a firm is in financial straits, directors and managers faithful to shareholder interests could protect the value of the shareholders’ residual claim by, for example, financial and/or workforce restructurings that eliminate prior claimants. All of which raises the question of why employees do not get the vote to protect themselves against this risk. The answer is two-fold. First, as we have seen, multiple constituencies are inefficient. Second, as addressed below, employees have significant protections that do not rely on voting.

Suppose a firm behaves opportunistically towards it employees. What protections do the employees have? Some are protected by job mobility. The value of continued dealings with an employer to an employee whose work involves solely general human capital does not depend on the value of the firm because neither the employee nor the firm have an incentive to preserve such an employment relationships. If the employee’s general human capital suffices for him to do his job at Firm A, it presumably would suffice for him to do a similar job at Firm B. Such an employee resembles an independent contractor who can shift from firm to firm at low cost to either employee or employer.[4]Mobility thus may be a sufficient defense against opportunistic conduct with respect to such employees, because they can quit and be replaced without productive loss to either employee or employer. Put another way, because there are no appropriable quasi-rents in this category of employment relationships, rent seeking by management is not a concern.

Corporate employees who make firm-specific investments in human capital arguably need greater protection against employer opportunism, but such protections need not include board representation. Indeed, various specialized governance structures have arisen to protect such workers. Among these are severance pay, grievance procedures, promotion ladders, collective bargaining, and the like.[5]

In contrast, shareholders are poorly positioned to develop the kinds of specialized governance structures that protect employee interests. Unlike employees, whose relationship to the firm is subject to periodic renegotiation, shareholders have an indefinite relationship that is rarely renegotiated, if ever. The dispersed nature of stockownership also makes bilateral negotiation of specialized safeguards difficult. The board of directors thus is an essential governance mechanism for protecting shareholder interests.

If the foregoing analysis is correct, why do we nevertheless sometimes observe employee representation? An explanation consistent with our analysis lies close at hand. In the United States, employee representation on the board is typically found in firms that have undergone concessionary bargaining with unions. Concessionary bargaining, on average, results in increased share values of eight to ten percent.[6]The stock market apparently views union concessions as substantially improving the value of the residual claim, presumably by making firm failure less likely. While the firm’s employees also benefit from a reduction in the firm’s riskiness, they are likely to demand a quid pro quo for their contribution to shareholder wealth. One consideration given by shareholders (through management) may be greater access to information, sometimes through board representation. Put another way, board of director representation is a way of maximizing access to information and bonding its accuracy. The employee representatives will be able to verify that the original information about the firm’s precarious financial situation was accurate. Employee representatives on the board also are well-positioned to determine whether the firm’s prospects have improved sufficiently to justify an attempt to reverse prior concessions through a new round of bargaining.

08/16/2018

As noted in a prior post, Senator Elizabeth Warren has introduced a bill that would require "corporate directors to consider the interests of all major corporate stakeholders—not only shareholders—in company decisions. Unlike state non shareholder constituency statutes, which are merely permissive, her bill would mandate such consideration.

As Stefan Padfield has noted:

There should be no doubt that imposing mandatory consideration of stakeholders on directors in carrying out their oversight responsibilities carries meaningful risk of undermining the wealth creation and innovation benefits of the corporate form as currently constituted.This general criticism has been well vetted elsewhere, and I will not rehash the debate here, though my declining to do so should not be construed as my being dismissive of relevant concerns regarding statism.

Because shareholder wealth maximization is the right rule, as we discussed in the preceding post, mandating that directors consider non-shareholder interests in making corporate decisions is clearly wrong in and of itself.

In contrast, many rules of state corporate law are enabling rather than mandatory. This is efficient because default rules are preferable to mandatory rules in most settings.[1] So long as the default rule is properly chosen, of course, most parties will be spared the need to reach a private agreement on the issue in question. Default rules in this sense provide cost savings comparable to those provided by standard form contracts, because both can be accepted without the need for costly negotiation. At the same time, however, because the default rule can be modified by contrary agreement, idiosyncratic parties wishing a different rule can be accommodated. Given these advantages, a fairly compelling case ought to be required before we impose a mandatory rule.[2] Mandatory rules are justifiable only if a default rule would demonstrably create significant negative externalities or, perhaps, if one of the contracting parties is demonstrably unable to protect itself through bargaining.

The use of mandatory rules at the federal level is particularly deplorable. If a state adopts an inefficient mandatory rule (see, e.g., much of California corporate law) corporations can respond by reincorporating in a state whose law is more enabling. Obviously, however, few corporations will seriously consider shifting their corporate headquarters to another country to avoid inefficient federal corporate laws. (Having said that, of course, many companies might go private (a.k.a. go dark) in response, as many did in response to SOX and Dodd-Frank.)

Unlike Delaware corporate law, which is typically updated annually to correct errors and improve the law, the federal government rarely revisits mistakes like SOX and Dodd-Frank. So we get stuck with bad federal rules.

As noted in a prior post, Senator Elizabeth Warren has introduced a bill that would require "corporate directors to consider the interests of all major corporate stakeholders—not only shareholders—in company decisions.

The Shared Interests of Managers and Labor in Corporate Governance: A Comment on Strine (May 10, 2007). UCLA School of Law Research Paper No. 07-15. Available at SSRN: https://ssrn.com/abstract=985683

Director versus Shareholder Primacy in New Zealand Company Law as Compared to U.S.A. Corporate Law (March 26, 2014). UCLA School of Law, Law-Econ Research Paper No. 14-05. Available at SSRN: https://ssrn.com/abstract=2416449

Corporate Social Responsibility in the Night Watchman State: A Comment on Strine & Walker (September 9, 2014). UCLA School of Law, Law-Econ Research Paper No. 14-12. Available at SSRN: https://ssrn.com/abstract=2494003

In the first place, requiring directors to maximize shareholder wealth provides the board of directors with a determinate metric for making business decisions. I often use the following example to explain what I mean by that: Suppose Acme's board of directors is considering closing an obsolete plant. The board is advised that closing the plant will cost many long-time workers their job and be devastating for the local community. On the other hand, the board's advisors confirm that closing the existing plant will benefit Acme's shareholders, new employees hired to work at a more modern plant to which the work previously performed at the old plant will be transferred, and the local communities around the modern plant. Assume that the latter groups cannot gain except at the former groups' expense. By what standard should the board make the decision?

Shareholder wealth maximization provides a clear answer -- close the plant. Once the directors are allowed to deviate from shareholder wealth maximization, however, they must inevitably turn to indeterminate balancing standards. Such standards deprive directors of the critical ability to determine ex ante whether their behavior comports with the law's demands, raising the transaction costs of corporate governance.

Worse yet, absent the clear standard provided by the shareholder wealth maximization norm, the board of directors will be tempted to allow their personal self-interest to dominate their decision making. Put another way, directors who are allowed to consider everybody's interests end up being accountable to no one.

In the plant closing example, if the board's interests favor keeping the plant open, we can expect the board to at least lean in that direction. The plant likely will stay open, with the decision being justified by reference to the impact of a closing on the plant's workers and the local community. In contrast, if the board of directors' interests are served by closing the plant, the plant will likely close, with the decision being justified by concern for the firm's shareholders, creditors, and other benefited constituencies.

As noted in a prior post, Senator Elizabeth Warren has introduced a bill that would require "corporate directors to consider the interests of all major corporate stakeholders—not only shareholders—in company decisions. Shareholders could sue if they believed directors weren’t fulfilling those obligations."

In a future post, I will take on the task of defending the shareholder wealth maximization norm on the merits.

Here I just want to point out the bizarre enforcement mechanism she's chosen: She wants directors to consider the interest of non-shareholder constituents who making corporate decisions, but if the directors fail to do so it is left to shareholders to sue. That makes no sense.

The problem here is that the decisions that matter are often zero sum ones in which the board must chose between shareholder and non-shareholder interests. After all, if a decision seems likely to lift all boats on a rising tide of corporate success, there are good reasons to respect director discretion. See my blog post on the business judgment rule. (By the way, would Warren allow the business judgment rule to apply to these suits? If not, that just makes it worse.)

So let's imagine a zero-sum decision in which the board has chosen to side with shareholder interests. Presumably, the shareholders are happy and the rational ones will not sue (although some plaintiff lawyer might find a stooge to bring a strike suit so as to extort legal fees from the corporation).

Conversely, imagine a zero-sum decision in which the board has chosen to side with non-shareholder interests. Now the shareholders will be unhappy and the rational ones will sue.

Bottom line? If you think the basic idea of giving directors discretion to consider non-shareholder interests is a good idea, Warren's enforcement proposal gets it exactly backwards. Shareholder standing to sue will to advance stakeholder interests but will only impede those interests.